Hockey takes the slow road to fiscal repair

Most of Treasurer
Joe Hockey
’s budget repair job relies on ever-rising taxes from employees, foreign aid cuts and new imposts on health and education.

Analysis of the budget shows much of the public angst – and in some cases hysteria – about the impact on the economy is overblown. The government plans to balance the budget in a far slower and more moderate way than earlier efforts.

“While much of the rhetoric surrounding the budget in recent weeks has suggested that it would be tough, what was delivered is best described as a gradual fiscal tightening, not front-loaded fiscal austerity," said HSBC Australia economist Paul Bloxham.

Mr Hockey on Wednesday hit back at critics who argue the government should have been tougher in its first budget, saying there would have been a “price to pay and we’re not prepared to do that".

As a result, the government’s first budget includes only a modest ­reduction in payments of $1.7 billion in 2014-15, growing to $5.9 billion in 2015-16.

According to Deutsche Bank economist Adam Boyton, former Liberal treasurer
Peter Costello
’s first two budgets – which were the toughest of the past three decades – were equivalent in today’s money to $12 billion in the first year and $20 billion in the second.

Mr Boyton noted that much of the improvement in the fiscal balance was being driven by improvements in the economy in coming years, rather than any heroics on spending cuts.

“General economic growth and bracket creep are more significant than the policy decisions taken in the budget," Mr Boyton said.

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Shock fears remain

While the government has emphasised that most of its major structural reforms won’t generate material dividends until 2017-18 and beyond, the lack of immediate action raises fears the budget remains vulnerable to shocks.

Ratings agencies largely backed Tuesday’s document as re-confirming Australia’s AAA credit rating, but both Moody’s and Standard & Poor’s warned it was only a first step.

S&P analyst Craig Michaels pointedly noted that the return to surplus was once again being pushed further out by a federal government.

“Ongoing willingness to make difficult budgetary choices may well be needed in coming years," he said, particularly if a major terms-of-trade shock delivers further revenue collapses.

The single biggest boost to the budget bottom line over the next four years will come from so-called bracket creep – which sees growth in Commonwealth coffers grow automatically as taxpayers see their inflation-driven wage hikes push them into higher tax brackets.

Middle Australia hit hardest

According to Grattan Institute director John Daley, bracket creep means by 2017-18 taxpayers – particularly those on middle incomes – will be slugged an extra $18 billion a year and rising.

Those on middle incomes, earning around $70,000 a year, will pay an extra $1500 a year.

“It’s at least a credible attempt to get to a surplus, but most of the heavy lifting is done on bracket creep and a lot more falls on middle Australia than anywhere else," said Dr Daley.

The second-biggest tailwind for budget repair comes from the $7.6 billion saved over four years from reductions in planned aid spending.

Next, and close behind in terms of money, come the cuts to family tax benefits, followed by $4 billion in extra ­revenue from fuel excise re-indexation.

Citigroup’s Josh Williamson ­de­s­cribed Mr Hockey’s first budget as ­having a “bark worse than its bite".

He said the reduced deficit in the coming financial year would generate only a “moderate headwind" to economic growth.

“If the reported drop in consumer sentiment associated with budget speculation is reversed, then we don't see any major implications from the budget for the Reserve Bank of Australia and the equity market," he said.